LME Alters Warehousing Rules to Shorten Withdrawal Times

By Agnieszka Troszkiewicz and Maria Kolesnikova -
Nov 8, 2013

The London Metal Exchange, the
world’s biggest industrial-metals marketplace, changed its rules
to speed up withdrawals from warehoused stockpiles amid consumer
complaints that prompted scrutiny from U.S. regulators.

The changes will affect depots where waiting times exceed
50 calendar days, a notice e-mailed to LME members yesterday
showed. The exchange’s original July proposal pertained to sites
where waits were longer than 100 days. The LME also said it will
review its warehouse system every six months and is studying its
powers to regulate warehousing companies’ charges.

Consumers of metals including brewer MillerCoors LLC
complained that lengthy waits for stockpiled supplies inflated
costs. That spurred U.S. regulators to subpoena documents from
warehouse operators including a Goldman Sachs Group Inc. (GS) unit,
according to people with knowledge of the probe. The changes are
scheduled to take effect April 1, said the LME, founded in 1877
and now a unit of Hong Kong Exchanges & Clearing Ltd.

“With the current proposal they addressed most of the
things that were not working,” said Michael Widmer, an analyst
at Bank of America Corp. in London. “The system is broken. The
LME has a physically deliverable contract that is not physically
deliverable.”

External Review

Warehouses with waiting times above 50 days will be
required to ship out metal every day exceeding the amount they
take in by at least 1,500 metric tons under the changes. The LME
also plans to create a Physical Market Committee that will have
a “substantial role” in the warehouse reviews and to
commission a full external logistical review of warehousing.

“We believe that the amended proposal is, on balance, the
best solution for all market users,” Garry Jones, who became
the exchange’s chief executive officer at the end of September,
said in the notice.

The LME, where investors bought and sold contracts worth
$14.5 trillion last year, oversees more than 700 warehouses
around the world. Waiting times exceed 50 days in Detroit, New
Orleans, the Dutch city of Vlissingen, Malaysia’s Johor and
Antwerp in Belgium. New Orleans and Johor are the two biggest
repositories for copper stocks, while Detroit and Vlissingen
hold the most aluminum.

“The London Metal Exchange is right to take action to
respond to the hardships faced by aluminum end users, and the
concerns raised by government regulators and policy makers,”
U.S. Senator Sherrod Brown, a Democrat from Ohio, said in an e-mailed statement. “However, we need a clear, enforceable, and
immediate standard that fixes the problems.”

Senate Hearing

Brown, who leads a Senate Banking subcommittee, held a
hearing in July on banks’ activities in commodities warehousing.
He plans to hold another hearing on Nov. 20 with regulators,
according to a person familiar with the schedule.

Goldman Sachs and mining company Glencore Xstrata Plc (GLEN),
which also has a warehousing unit, declined to comment. The LME
consulted market participants for three months on the changes.

The LME also said yesterday it will introduce separate
delivery requirements for steel. In addition, the exchange plans
to start releasing delayed inventory data on a per-warehouse
basis and separately publish reports on traders’ positions that
may take three to six months to prepare, Jones said at a press
conference in London.

Withdrawing stockpiled aluminum takes a near-record 18.9
months in Detroit and 18 months in Vlissingen, researcher Harbor
Intelligence estimated Nov. 4. Premiums added to LME prices
reached the lowest levels in more than a year after the exchange
made its original recommendation, before rebounding last month.

Lower Premiums

Premiums will fall at a faster pace as a result of the rule
changes, Matthew Chamberlain, the exchange’s head of strategy
and implementation, said at the press conference. Waiting times
may rise at first as investors order metal removed from
warehouses before dropping back, he said.

The exchange had said in July warehouse companies might
raise rent and withdrawal charges to compensate for lost income.
The amended changes address concerns about such “unintended
consequences,” Chamberlain said.

He also said the LME will “absolutely consider” using its
powers to regulate withdrawal times if it sees “rent inflation
or FOT inflation going forward.” FOT, or free-on-truck, is a
charge to load metal being withdrawn from stocks.

‘Self-Discipline’

“We are calling for the self-discipline of the warehouse
operators,” Chamberlain said. “Competition law, particularly
in Europe, is developing quickly. It’s right that we always
consider our options and update our advice, and we are
absolutely continuing to do that in respect of our powers to cap
rents, which have been requested by many respondents of the
consultation.”

The changes are the first step in strengthening the LME’s
warehousing arrangements and making the market more transparent,
the U.K. Financial Conduct Authority, which supervises the
exchange, said in a statement on its website.

“These decisions will make a strong and sustained
contribution to the smooth running of the LME system once they
come into force,” Simon Collins, head of non-ferrous and bulk
commodities at raw-materials trader Trafigura Beheer BV, said in
an e-mailed comment. Trafigura also runs warehouses.

The original proposal was criticized as a potential spur to
further market distortion by United Co. Rusal, the world’s
largest aluminum producer. Alcoa Inc., which ranks first in the
U.S., urged the LME to suspend the plan. MillerCoors and soft-drink makers, who use aluminum in cans, said the proposed
changes would do too little to reduce backlogs.

Shares Fall

Alcoa shares dropped as much as 7.8 percent yesterday in
New York, while Rusal declined as much as 2.9 percent in Hong
Kong.

“Over the longer term, we should see more closures in some
of the aluminum smelters because they have survived on the
premiums,” said Grant Sporre, an analyst at Deutsche Bank AG in
London. “Therefore, the flat LME price should rise. The net
result over the longer term is that consumers will still pay the
same price for their metal.”

Aluminum for delivery in three months fell 12 percent this
year to $1,823 a ton on the LME. Goldman Sachs said last month
policies aimed at reducing the queues would affect the economic
role of the exchange market, stoke price volatility and lead to
more metal being stored outside the exchange.

Subpoenas Issued

Glencore’s Pacorini Metals has the most Vlissingen depots
and Goldman Sachs’s Metro International Trade Services LLC
dominates in Detroit. Goldman Sachs and JPMorgan Chase & Co.,
which also has a warehouse unit, received subpoenas from the
Commodity Futures Trading Commission, according to two people
familiar with the probe. Glencore also was subpoenaed, another
person said Aug. 13.

“The implementation of this proposal will result in
smaller, independent LME warehouses being able to compete more
successfully in this market,” Simon Maddocks, chief executive
officer of CWT Commodities (Metals) Ltd. in London, a warehouse
company approved to store metals, said by phone yesterday.

The LME last year doubled the minimum rate at which
warehouse companies storing more than 900,000 tons at a single
site must ship out metal. This year it introduced an extra
delivery requirement for storage companies where withdrawal
orders exceed 30,000 tons of a single metal, as well as separate
minimum daily deliveries of tin and nickel.

18 Lawsuits

Eighteen class-action lawsuits were filed against the LME,
Hong Kong Exchanges said Nov. 6. The LME said the lawsuits are
without merit. Beverage makers have said banks and other
warehouse owners are manipulating aluminum supplies and slowing
deliveries to drive up prices.

While the new rules will permit more aluminum to leave
warehouses, so-called financing transactions may still prevent
supplies from reaching consumers. As much as 80 percent of the
LME’s 5.35 million-ton aluminum stockpile and 60 percent of zinc
inventories may be tied to the accords and unavailable for
withdrawal, Societe Generale SA estimates.

“Financing of stock will continue to remain attractive,
even with this 50-day cap,” Robin Bhar, an analyst at Societe
Generale in London, said by phone yesterday. “It doesn’t mean
that consumers will have more availability of physical metals.
It would accelerate flow of metal from the LME system into the
hidden system. This would seem to suggest that we would get less
transparency, rather than more.”

Investors use the transactions to capitalize on markets in
contango, when prices rise for later deliveries. The accords
typically involve buying metal for nearby delivery while making
a forward sale, with profitability influenced by the spread,
rent charges and borrowing costs.